October 22, 2008

David Ricardo: The Iron Law of Wages, 1817

David Ricardo (1772-1823), an English banker was also an important
early economist. His most well-known argument was that wages "naturally"
tended towards a minimum level corresponding to the subsistence
needs of the workers. The attraction of this idea for factory
owners is evident. It also influenced Marx in his early pessimistic
views about the possibility of workers benefiting from capitalism.
Ricardo's views on the "labor theory of value" were
also important in Marx's economic thought.

From David Ricardo. On Wages

Money, from its being a commodity obtained from a foreign country,
from its being the general medium of exchange between all civilized
countries, and from its being also distributed among those countries
in proportions which are ever changing with every improvement
in commerce and machinery, and with every increasing difficulty
of obtaining food and necessaries for an increasing population,
is subject to incessant variations. In stating the principles
which regulate exchangeable value and price, we should carefully
distinguish between those variations which belong to the commodity
itself, and those which are occasioned by a variation in the medium
in which value is estimated, or price expressed.

A rise in wages, from an alteration in the value of money, produces
a general effect on price, and for that reason it produces no
real effect whatever on profits. On the contrary, a rise of wages,
from the circumstance of the labourer being more liberally rewarded,
or from a difficulty of procuring the necessaries on which wages
are expended, does not, except in some instances, produce the
effect of raising price, but has a great effect in lowering profits.
In the one case, no greater proportion of the annual labour of
the country is devoted to the support of the labourers; in the
other case, a larger portion is so devoted.

Labour, like all other things which are purchased and sold, and
which may be increased or diminished in quantity, has its natural
and its market price. The natural price of labour is that price
which is necessary to enable the labourers, one with another,
to subsist and to perpetuate their race, without either increase
or diminution.

The power of the labourer to support himself, and the family which
may be necessary to keep up the number of labourers, does not
depend on the quantity of money which he may receive for wages,
but on the quantity of food, necessaries, and conveniences become
essential to him from habit, which that money will purchase. The
natural price of labour, therefore, depends on the price of the
food, necessaries, and conveniences required for the support of
the labourer and his family. With a rise in the price of food
and necessaries, the natural price of labour will rise; with the
fall in their price. the natural price of labour will fall.

With the progress of society the natural price of labour has always
a tendency to rise, because one of the principal commodities by
which its natural price is regulated, has a tendency to become
dearer, from the greater difficulty of producing it. As, however,
the improvements in agriculture, the discovery of new markets,
whence provisions may be imported, may for a time counteract the
tendency to a rise in the price of necessaries, and may even occasion
their natural price to fall, so will the same causes produce the
correspondent effects on the natural price of labour.

The natural price of all commodities, excepting raw produce and
labour, has a tendency to fall, in the progress of wealth and
population; for though, on one hand, they are enhanced in real
value, from the rise in the natural price of the raw material
of which they are made, this is more than counterbalanced by the
improvements in machinery, by the better division and distribution
of labour, and by the increasing skill, both in science and art,
of the producers.

The market price of labour is the price which is really paid for
it, from the natural operation of the proportion of the supply
to the demand; labour is dear when it is scarce, and cheap when
it is plentiful. However much the market price of labour may deviate
from its natural price, it has, like commodities, a tendency to
conform to it.

It is when the market price of labour exceeds its natural price,
that the condition of the labourer is flourishing and happy, that
he has it in his power to command a greater proportion of the
necessaries and enjoyments of life, and therefore to rear a healthy
and numerous family. When, however, by the encouragement which
high wages give to the increase of population, the number of labourers
is increased, wages again fall to their natural price, and indeed
from a reaction sometimes fall below it.

When the market price of labour is below its natural price, the
condition of the labourers is most wretched: then poverty deprives
them of those comforts which custom renders absolute necessaries.
It is only after their privations have reduced their number, or
the demand for labour has increased, that the market price of
labour will rise to its natural price, and that the labourer will
have the moderate comforts which the natural rate of wages will
afford.

Notwithstanding the tendency of wages to conform to their natural
rate, their market rate may, in an improving society, for an indefinite
period, be constantly above it; for no sooner may the impulse,
which an increased capital gives to a new demand for labour, be
obeyed, than another increase of capital may produce the same
effect; and thus, if the increase of capital be gradual and constant,
the demand for labour may give a continued stimulus to an increase
of people....

Thus, then, with every improvement of society, with every increase
in its capital, the market wages of labour will rise; but the
permanence of their rise will depend on the question, whether
the natural price of labour has also risen; and this again will
depend on the rise in the natural price of those necessaries on
which the wages of labour are expended....

As population increases, these necessaries will be constantly
rising in price, because more labour will be necessary to produce
them. If, then, the money wages of labour should fall, whilst
every commodity on which the wages of labour were expended rose,
the labourer would be doubly affected, and would be soon totally
deprived of subsistence. Instead, therefore, of the money wages
of labour falling, they would rise; but they would not rise sufficiently
to enable the labourer to purchase as many comforts and necessaries
as he did before the rise in the price of those commodities....

These, then, are the laws by which wages are regulated, and by
which the happiness of far the greatest part of every community
is governed. Like all other contracts, wages should be left to
the fair and free competition of the market, and should never
be controlled by the interference of the legislature.

The clear and direct tendency of the poor laws is in direct opposition
to these obvious principles: it is not, as the legislature benevolently
intended, to amend the condition of the poor, but to deteriorate
the condition of both poor and rich; instead of making the poor
rich, they are calculated to make the rich poor; and whilst the
present laws are in force, it is quite in the natural order of
things that the fund for the maintenance of the poor should progressively
increase till it has absorbed all the net revenue of the country,
or at least so much of it as the state shall leave to us, after
satisfying its own never-failing demands for the public expenditure.

This pernicious tendency of these laws is no longer a mystery,
since it has been fully developed by the able hand of Mr. Malthus;
and every friend to the poor must ardently wish for their abolition.

From The Works of David Ricardo, J. R. McCulloch, ed. (London:
John Murray, 1881), pp. 31, 50-58.